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ETFs for Oil-Rich Countries

Just ahead of the U.S. peak summer driving season, oil prices
are breaking higher. For ETF investors there are several ways to
play this trend, or to invest in oil for the longer term. Some
ETFs provide exposure to oil through futures contracts on the
commodity itself. Others have holdings of oil infrastructure
companies. Though less direct, there is a third way to invest in
oil: ETFs covering oil-rich countries.

In many countries rich in oil, oil companies themselves are
state-owned and therefore not accessible to investors. But the
logic here is that if oil does well, economies of oil rich
countries overall will benefit. Investment in financial or
telecom sectors, which tend to be heavily represented in oil
country ETFs, should see gains.

Countries with the largest proven oil reserves are Saudi
Arabia, Canada, Iran, Iraq, Kuwait, United Arab Emirates,
Venezuela, Russia, Libya and Nigeria, in that order. Of these
ten, only Canada and Russia currently have their own focused ETF
product. Some of these countries, like Libya, Iraq, and Iran, are
virtually impossible for U.S. retail investors to access. Several
regionally focused ETFs provide exposure to equities in Kuwait,
the UAE, and Nigeria.

How does the performance of ETFs providing exposure to
oil-rich countries compare to more traditional oil
investment?

The chart below compares the 1-year performance of four ETFs.
It show 1) the United States 12-Month Oil (NYSEArca:USL), which
offers exposure to oil through staggered futures contracts, 2)
the Energy Select Sector SPDR (NYSEArca: XLE), which provides
exposure to oil majors like Exxon Mobile and Chevron, 3) iShares
MSCI Canada (NYSEArca:EWC), a broad Canadian market ETF, and 4)
Market Vectors Gulf States ETF (NYSEArca:MES), providing exposure
to non-oil companies in Kuwait, Qatar, and Abu Dhabi.

The chart shows Canada outperforming. The Gulf States ETF is
the most volatile of the four in the period shown. MES outpaced
more direct investment in oil through October. It fell sharply
through February, losing ground against the strict commodity
futures ETF USL. Recently MES moved sharply upward. USL shows
decent correlation with XLE. Both moved higher with crude (though
spot oil increased far more over this period).

EWC's outperformance in the chart is not strictly because of
higher oil. Less than 25% of EWC's holdings are in the energy
sector. Financial assets make up a third of the fund. Royal Bank
of Canada (
RY
) and Toronto Dominion Bank (
TD
) are its the two largest holdings. About 20% of EWC is in the
industrial materials sector. Part of the reason EWC has
outperformed here is that financial assets were sharply
discounted this time last year. In addition to benefitting from
higher oil and raw materials prices, oil has also has played a
more subtle role in the strength of EWC. It has helped anchor the
Canadian dollar. The fund's assets are denominated in Canadian
dollars so appreciation of the Canadian dollar means higher U.S.
dollar returns.

MES's performance is dominated by the financial sector, which
makes up over 60% of the fund. As the chart shows, performance
mirrored EWC until the beginning in November, when the Dubai
World debt crisis hit, creating uncertainty for financial
institutions, particularly in the Middle East. Significantly,
however, MES did not crash upon the announcement that Dubai
Worlds debt payments were to be delayed. One reason is the fund's
holdings are not primarily in the Dubai, though 20% are in the
UAE. 60% goes to Kuwait. 15% are in Qatar (not in the top ten
countries as measured by total reserves, but on par with Saudi
Arabia for oil wealth in terms of size and population). The
remaining 5% of asserts are in Oman and Bahrain.

The chart below compares Canada's EWC with ETFs representing
Russia and Africa: Russia Market Vectors Russia ETF
(NYSEArca:RSX) and Market Vectors Africa (NYSEArca:AFK). Russia's
fortunes have always depended on oil and other raw materials to a
greater extent than even Canada. The same is true for African
countries like Libya and Nigeria.

The volatility in the chart is largely due to the economic
crisis. Like other emerging market countries Russia was hurt by
the world-wide slowdown. The period shown represents the rebound
from the fierce sell-off a year earlier. In terms of oil
exposure, when compared with EWC, RSX is more heavily invested in
oil. Energy and energy-related equities currently compose about
40% of the fund. Like EWC, RSX is also heavily invested in
industrial materials and telecommunications. Financials account
for between 10 and 15% of RSX.

Market Vectors' Africa fund AFK has little (about 10%) direct
exposure to energy companies. 20% of overall country allocation
goes to Nigeria, the most important country in Africa in terms of
oil assets. South Africa gets about 30% of the fund. Morocco and
Egypt together are about 30% of the fund. The remainder is
devoted to smaller African countries, including Equatorial
Guinea, Mali and Zambia. AFK has some exposure to the energy
sector, though mostly not through Nigerian holdings. At around 7%
of the fund, South Africa's Tullow Oil (NasdaqGM:TLW) is its
single largest holding.

A list of ETFs representing Oil-Rich countries and their
expense ratios follows:

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